Why the company paying beats you paying
Personal contributions only get tax relief up to 100% of relevant UK earnings, and dividends do not count as earnings. So a director paid a small salary can personally put in no more than that salary, gross, or £3,600 gross for 2026/27 if the salary is lower than that, whatever is sitting in the company account.
An employer contribution is not capped by earnings at all, only by the annual allowance. That, more than anything, is why the company should be the one paying.
A contribution made by the company is an allowable business expense, so it reduces Corporation Tax. For 2026/27 that relief is worth 19% on profits under £50,000 and 25% on profits above £250,000. In the marginal relief band between the two, the 2026/27 effective rate is 26.5%, which is where the relief is worth most.
There is no Income Tax on the contribution and no National Insurance for the company or the director.
Compare that with taking the same money as a dividend. The company pays Corporation Tax on the profit first, then the director pays dividend tax on what is left. The pension route defers both; it is a deferral rather than an exemption.
25% comes out tax-free, capped by the lump sum allowance of £268,275 for 2026/27, and the rest is taxed as income when it is drawn.
The catch is obvious: the money cannot normally be touched until 57. The minimum age is 55 until 5 April 2028 and 57 from 6 April 2028, so anyone born on or after 6 April 1973 is waiting until 57.
One further change to factor in: from 6 April 2027 most unused pension funds fall inside the estate for Inheritance Tax. The pension is still efficient while the director is alive and drawing it; it is no longer the estate-planning wrapper it was before that date.
The annual allowance
£60,000 for 2026/27 across all contributions, including anything an employer pays. Unused allowance from the previous three tax years can be carried forward, provided the director was a member of a registered pension scheme in each of those years. A company that has not contributed before may therefore be able to pay well over the 2026/27 allowance in one go.
Get the arithmetic wrong and the excess is charged to Income Tax on the director personally at their marginal rate. That undoes the point of the exercise, so calculate the available allowance from the scheme records before the money moves, not after.
For 2026/27 the allowance tapers only if both tests are met: threshold income above £200,000 and adjusted income above £260,000. It then falls by £1 for every £2 of adjusted income above £260,000 for 2026/27, down to a floor of £10,000 at £360,000.
The employer contribution itself counts towards adjusted income, though not threshold income. That is why a director on a low salary and modest dividends is usually nowhere near it. And if the director has already flexibly accessed a pension, the money purchase annual allowance replaces it at £10,000 for 2026/27, with no carry-forward against it.
The condition people forget
The contribution has to be wholly and exclusively for the purposes of the trade, like any other expense. HMRC looks at the whole remuneration package, salary, benefits and pension together, and asks whether it is commensurate with the value of the work that person does.
The comparison is what the company would pay someone unconnected to do the same job. For a working director running the business this is rarely in doubt, whatever the salary looks like in isolation. Where it does get looked at is a large contribution for a spouse or family member whose involvement is limited.
There is also an outer limit on the one-off approach. Under s197 Finance Act 2004, where a contribution exceeds 210% of the previous period’s and the excess over 110% of it reaches £500,000, relief is spread over two to four periods. At director-scale contributions this does not arise.
Timing matters more than people expect
Relief is given in the accounting period in which the contribution is paid, not when it is accrued. So a contribution made a week after the year end lands in the following year’s Corporation Tax computation.
That is worth knowing before the year end, and worth nothing after it. It is the whole argument for looking at this quarterly rather than in the accounts meeting.
2026/27 figures. This page covers the tax treatment of an employer pension contribution. It is not a recommendation to make one, and it is not financial advice. Whether a pension is the right home for the money, and which scheme, is a question for an FCA-authorised financial adviser. Finstem can say what a contribution does to the company’s Corporation Tax; it cannot say whether to make one.
Common questions
Q1How much can my company pay in?
Up to the annual allowance of £60,000 for 2026/27, including all contributions, with up to three years of unused allowance potentially carried forward.
Q2Does the company get tax relief?
Yes. It is an allowable expense and reduces Corporation Tax, provided it meets the wholly and exclusively test.
Q3Is it better than taking a dividend?
Often, though not in every case, and it is a deferral rather than a saving. The company gets Corporation Tax relief and there is no dividend tax now, but everything above the tax-free lump sum is taxed as income when it is drawn.
Q4When should the contribution be made?
Before the accounting year end if the relief is wanted in that year. Relief follows the date of payment, not the accounting entry.
